Seven-Year Itch Hits Office Demand; Slowing Absorption and Lease Rates
Demand for Orange County office space in 2017 has fallen by
half compared to earlier in the economic recovery, and rates of rent growth
also have slowed dramatically this year, according to Lee & Associates’
third-quarter survey of Orange County’s 112.4-million-sq.-ft. office market.
Net absorption through the first three quarters still is in
positive territory, totaling 593,968 sq. ft., but the volume of space coming
off the market so far this year is 49.8% less than in the average of first
three quarters of each year since 2011.
Additionally, steady quarterly gains in lease rates have
slowed, especially for Class A office space. New data shows that Class A asking
rents have increased 3% this year compared to the 10.2% average increase for the
same nine-month period in the last three years.
Plenty of economists have prophesied about eight-year real
estate and economic cycles to help explain the softening of office markets
nationwide that has been widely reported this year. It’s clear that local office demand has lost
some steam despite a still solid local recovery and a strong national economy
that in Q3 grew at a 3% annual rate.
Locally, the sudden downshift in demand is altering
expectations for landlords, particularly those in the Airport and South Orange
County submarkets, where new premium buildings are hitting the market. Two buildings totaling 671,696 sq. ft. were
delivered in Q3 and eight buildings totaling 1.4 million sq. ft. are
underway.
Buildings in South County and around John Wayne Airport comprise
nearly 60% of existing county office space as well as the county’s newest Class
A buildings. But the two submarkets have
gone in different directions this year. South County’s net absorption year to
date totals 385,265 sq. ft. versus a negative 328,959 sq. ft. through Q3 in the
Airport submarket. The South County
vacancy rate is 9.4% compared to 11.4% at the Airport, where a 537,000-sq.ft.
office building is slated for completion early next year with no major tenants
announced, so far.
The vacancy rate in the small 8.9-million-sq.-ft. West
County submarket settled at 7.3% on 44,613 sq. ft. of net absorption in
Q3.
The 22.3-million-sq.-ft. Central County submarket, which
includes Orange, Anaheim, Garden Grove, Santa Ana and Tustin, ended Q3 with an
11.5% vacancy rate. Net absorption was
negative by 74,198 sq. ft. in Q3 but is up 420,960 sq. ft. for the year.
The 14.2-million-sq.-ft. North County office market posted a
9.5% vacancy rate in Q3 with net absorption of 43,968 sq. ft.
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